Critics assail Davis-backed procurement reform

A procurement reform championed by Rep. Tom Davis, R-Va., is drawing fire from critics who charge it could weaken oversight of certain federal contracts and potentially subject the government to mammoth cost overruns.

The measure, which was included in the House-passed version of the Defense authorization bill (H.R. 1588), would allow agencies to award labor-hour and time and material contracts-where vendors bill the government for the amount of hours they work-without requiring firms to submit pricing data or face audits of their spending practices. The provision is Section 1442 in the bill.

Under the provision, agencies could use acquisition guidelines in Part 12 of the Federal Acquisition Regulation-which require less stringent oversight-to govern labor hour contracts. In the past, the Office of Management and Budget and government watchdog groups have tried to discourage the use of these contracts, because they do not require contractors to deliver a finished product to get paid and can result in cost overruns.

For example, at an April 30 hearing of the House Government Reform Committee, Office of Federal Procurement Policy Administrator Angela Styles cited a labor-hour contract at one agency that ballooned from $104 million to $700 million from February to December 2002. "There was no incentive for the contractor to control cost," said Styles at the hearing.

Despite Styles' testimony, the Bush administration did not specifically oppose Section 1442 in its statement of administration policy on the Defense bill. The Office of Management and Budget on Monday did not answer requests to clarify its position on the measure.

Rep. Henry Waxman, D-Calif., opposes the labor-hour provision, and will fight it in the House-Senate conference over the Defense bill, according to Karen Lightfoot, a minority spokesperson for the House Government Reform Committee, on which Rep. Waxman is the ranking minority member.

"[Rep.] Waxman is still very concerned about time and material contracts," said Lightfoot. "I think his preference would be that the section just be struck from the bill, but we'll just have to wait and see what opportunities there are to have it removed or modified."

Charles Tiefer, a professor at the University of Baltimore Law School, said Section 1442 would make it easier for contractors to overcharge the government. "The proposed provision completely lacks effective safeguards to keep the government from being overcharged," he said.

But Davis and associations representing contractors note that labor-hour contracts are commonly used in the private sector, and as such should be regulated under Part 12 rules, which were designed for the acquisition of commercial items. "It's not a revolutionary new concept," said Stan Soloway, president of the Professional Services Council, an Arlington, Va.-based contractor association. "It's a very commercial practice."

David Marin, a spokesman for Davis, said poor management caused the cost overruns cited by Styles. "All I can say is, the contract she references must have been terribly mismanaged," he said. "Davis continues to focus on performance-based contracting, which, if managed well, should not permit skyrocketing costs."

Styles was referring to a Transportation Security Administration contract with NCS Pearson Inc., a firm based in Eden Prairie, Minn., to recruit and hire baggage screeners, according to sources familiar with the contract.

Marin added that agencies could control costs on labor-hour contracts by setting ceilings for how much they will pay per hour, a standard feature of such pacts. "These contracts are to include a ceiling that can only be exceeded at the contractor's risk," he said. "It's easy to talk about how past contract costs ballooned; we think we should now be talking about giving agencies the tools to ensure it doesn't happen again."

But contractors can hit this price ceiling without delivering a finished product to the agency in labor-hour contracts, which is why the government should conduct cost audits of how its money is being spent, according to Tiefer. The government would cede its right to conduct cost audits under Section 1442, he said.

Marin disputed this point. Section 2313 of Title 10 of the U.S. Code, among other provisions, would still guarantee agency access to contractor pricing data in labor hour contracts, he said.

Larry Allen, executive director of the Washington-based Coalition of Federal Procurement, which supports the provision, said federal agencies already buy many services with labor-hour contracts, particularly through the popular supply schedules program run by the General Services Administration.

"It is perhaps the most popular way to buy commercial services in government today, so if you take away the most popular acquisition method you are putting a major chink in the government's ability to function effectively," he said.

Time and material contracts are a convenient way for agencies to buy information technology services or consultant support because they often don't know the extent of the services they need before entering such contracts, added Soloway.

"The reason you use it with consultants is you don't know going in exactly what the scope of the problem is, so you have a time and materials strategy where you say, 'I'm going to pay X amount of dollars,'" he said.

Allen said Section 1442 was designed to keep Styles' Office of Federal Procurement Policy from preventing the use of Part 12 procedures to govern labor-hour contracts. Last summer, the OMB office tried to stop the General Services Administration from using Part 12 procedures to regulate labor-hour contracts awarded through the schedule. GSA uses Part 12 procedures for all contracts awarded through the schedule, including labor-hour contracts. The Office of Federal Procurement Policy eventually backed off, but Allen warned that the OMB proposal could reappear.

"The coalition's position is that OFPP should hold off on doing that until this legislation has an opportunity to be enacted," he said.

Section 1442 is one of several measures from Davis' Services Acquisition Reform Act (H.R. 1837) included in the Defense bill. The Defense bill does not include a provision to spur the use of share-in-savings contracts, which allow contractors to share savings produced by their innovations.

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